Recently Introduced Digital Asset Legislation Bears Watching
- Jun 21, 2022
- Jon Zefi
On June 7, bipartisan digital asset legislation was introduced by Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY), titled the “Lummis-Gillibrand Responsible Financial Innovation Act.” It is an effort to create a comprehensive regulatory framework for this growing asset class.
Broadly, the legislation does the following:
- Creates a clear standard for determining which digital assets are commodities and what types are securities
- Creates a clear set of definitions
- Assigns regulatory authority over digital asset spot markets to the Commodities Futures Trading Commission (CFTC)
- Defines and creates requirements for stablecoins, protecting consumers and markets and promoting faster payments
- Creates an advisory committee to develop guiding principles, empower regulatory agencies and advise lawmakers on fast-developing technology
- Imposes disclosure requirements on digital asset service providers to ensure that consumers understand the product and can make informed decisions when dealing with digital assets
- Mandates a study on digital asset energy consumption
- Directs the CFTC and SEC to study and report on the development of a self-regulatory organization (SRO) and develop a proposal for its creation
- Directs the CFTC and SEC to consult with Treasury and the National Institute of Standards and Technology to develop comprehensive, principles-based guidance relating to cybersecurity for digital asset intermediaries
- Provides a regulatory framework for state and federal regulators to collaborate on innovative financial technologies
- Creates a structure for the taxation of digital assets
- Directs the Government Accountability Office (GAO) to conduct an analysis of the potential opportunities and risks associated with investing retirement savings in digital assets and to report its findings to Congress, Treasury and the Department of Labor
- Directs the Office of Management and Budget, Cybersecurity and Infrastructure Security Agency, Director of National Intelligence and Defense Department to conduct an information security study around the digital yuan, China’s central bank digital currency
Taxation of Digital Assets
The proposed legislation creates a substantial framework for the taxation of digital assets.
De Minimis Exclusion from Taxation. The bill provides a de minimis exclusion from gross income of up to $200 per transaction for use of virtual currency for payment for goods and services, under specified conditions, subject to an inflation adjustment. All dispositions which are part of the same transaction (or a series of related transactions) would be aggregated. This provision would not apply to dispositions in which virtual currency is sold or exchanged for cash, cash equivalents, digital assets or other securities or commodities.This would apply to transactions entered into after December 31, 2022.
Clarification of Definition of Broker. The bill clarifies the definition of “broker” for purposes of the Infrastructure Investment and Jobs Act’s new reporting requirement on digital assets and delays the implementation of that reporting requirement to returns required to be filed and statements required to be furnished after December 31, 2025.
Trading Safe Harbor for Non-U.S. Persons. The bill extends the existing safe harbors for securities and commodities trading activity by non-U.S. persons to digital assets under specified conditions.This provision would apply only if the digital assets are of a kind customarily dealt in on a digital asset exchange and if the transaction is of a kind customarily consummated at such exchange. This would apply to sales and exchanges after December 31, 2022.
Lending Agreements. Under existing law, securities lending transactions are generally not taxable events, if certain conditions are satisfied. This provision, effective for sales and exchanges after December 31, 2022, would establish that, similarly, digital asset lending is generally not a taxable event. Treasury may issue regulations to implement this section, including its application to forks, airdrops, and similar subsidiary value.
Decentralized Autonomous Organizations. The bill defines “decentralized autonomous organization” (DAO) and proposes that the default classification for DAOs be a business entity which is not a disregarded entity. A DAO is an organization (i) which utilizes “smart contracts” to effectuate collective action for a business, commercial, charitable, or similar entity, (ii) governance of which is achieved primarily on a distributed basis and (iii) which is properly incorporated or organized under the laws of a state or foreign jurisdiction as a DAO, cooperative, foundation or similar entity.
Digital Asset Mining and Staking. The bill provides that in the case of a taxpayer who conducts digital asset mining or staking activities, the amount of income relating to such activities is not included in gross income of the taxpayer until the taxable year of the disposition of the assets produced or received in connection with the mining or staking activities.
IRS Guidance. The bill mandates that not later than one year after the date of enactment of this legislation, the IRS will adopt guidance relating to the following:
- Classification of forks, airdrops, and similar subsidiary value as taxable, contingent on the affirmative claim and disposition of the subsidiary value by a taxpayer
- Merchant acceptance of digital assets and the tax treatment of payments and receipts
- Treatment of digital asset mining and staking, including mining and staking rewards, in which income is not realized until disposition of the assets produced or received in connection with such activity
- Allowance of charitable contributions of digital assets greater than $5,000, and which are traded on established financial markets, as readily valued property not requiring a qualified appraisal
- Characterization of payment stablecoins as indebtedness
This guidance would generally be applicable on a prospective basis for taxable years beginning after December 31, 2023. Amendments to the charitable deduction rules would apply to taxable years beginning after December 31, 2022.
Chances for Passage
In the current political environment, adoption of any legislation in the near-term is rather problematic, particularly as we get closer and closer to the mid-term Congressional elections in November. While it does have the benefit of bipartisan sponsorship, the legislative process is long. More likely, it will be an important reference point for consideration of digital asset legislation, not just in 2022, but beyond.
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Jon Zefi is a member of the Tax Advisory Services Group and National Technology Services Sector Leader, within the firm’s Technology and Life Sciences Group, providing tax services, planning and compliance advice with a focus on private equity, estate planning, joint ventures and mergers and acquisitions for privately held businesses and public companies.
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